2007 Headlines
Expert Service Problem Leads to Under and Overtreatment of Auto Repairs
Possibility for Repeat Business Doesn't Affect Repair Recommendations
November 16, 2007 | Ithaca, NY | Consumers often wonder if they are getting fair and honest treatment when seeking services from experts. Any time a consumer is reliant upon an expert to both diagnose and fix a problem, whether it's an auto mechanic, plumber, roofer, doctor, or other service provider, there is an incentive for the expert to provide more service than the customer truly needs.
Henry Schneider, an assistant professor of economics at Cornell University's Johnson School of Management, set out to explore this "expert service" dilemma and summarized his work in the paper, "Agency Problems and Reputation in Expert Services: Evidence From Auto Repair."
To conduct his research, Schneider posed as a motorist who was either moving to the area or relocating within a few weeks to test whether the possibility of developing a long-term relationship at the garage mattered in the diagnosis or cost of recommended services. The same car was used at each of the 40 garages he visited and the defects were prearranged to be relatively easy to spot and repair, including a loose battery cable, low engine coolant, and a blown taillight.
Schneider found that overtreatment, or recommending unnecessary repairs, was present in 27 percent of visits and that under-treatment, or the lack of recognizing and recommending repairs on defects that could generate much larger problems in the future, occurred in 77 percent of the visits. Under-treatment may have been more prevalent because two of the legitimate defects, the blown taillight and the low coolant, are inexpensive to fix so the mechanic may not invest the time to check for them. He found no evidence that a mechanic's pursuit of a good reputation, as determined by service to the customer who was moving to the area, improved service quality, although it did lead to a lower upfront diagnosis fee.
"The prevalence of under and overtreating, even when repeat business is possible, suggests that motorists are typically unable to detect its presence, and indicates that diagnoses may be highly unreliable," commented Schneider. "It's this inability to directly assess mechanic behavior that appears to prevent motorists from employing reputation incentives, such as possible repeat business, to keep mechanics honest. In contrast, the absence of overcharging suggests that motorists can sometimes verify whether a repair price is reasonable compared to what other mechanics may charge."
The need for an expert to preserve or build a good reputation is most apparent in markets with the opportunity for repeat business where the buyers can explicitly evaluate seller behavior and skill such as tailoring, animal grooming, hair styling, and housecleaning. But, in markets were consumers can not easily identify good or bad service, such as auto repair and even pay-for-procedure medical settings, unfortunately, a good reputation is not a strong enough motivation to change experts' behavior.
